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U.S. GAO’s Report to Congressional Committees on Need to Further Consider Proposals’ Impact on Systemic Risk

The report was compiled in accordance with Dodd-Frank’s mandate in Section 202, paragraph (e) (“Study of Bankruptcy and Orderly Liquidation Process for Financial Companies”), that the GAO continually report on ways for the Bankruptcy Code to more effectively provide for a resolution to systemic risk. The principal recommendation made by the report was that the Financial Stability Oversight Counsel consider the benefits and disadvantages of various changes to the Bankruptcy Code with respect to financial institutions and qualified financial contracts. The report did not express a view as to whether such changes were needed or not, and in particular noted that the persons whom it consulted were divided on the appropriate treatment of qualified financial contracts.

Lofchie Comment: Interestingly, the report (from page 34 on) could be read as critical of the “orderly liquidation process” established by Dodd-Frank, actually increasing the uncertainty as to what will happen in the bankruptcy of a financial institution.